NHMC chief says REIT is dead

MANILA, Philippines - Real estate investment trusts (REIT) in the Philippines is already dead before it can even start with the country’s housing finance chief saying the law’s implementing rules and regulations (IRR) was a “kiss of death” to the measure.

“We have a very unique REIT animal here. Investors take advantage of the tax advantage of REIT, but in our case, we piggy backed that rule with the minimum public float requirement which is also high,” said Felixberto Bustos Jr., president of the National Home Mortgage Corp. (NHMC).

“That minimum public float, especially at the third year, was like a kiss of death to the REIT,” Bustos told reporters during a briefing last week.

Enacted in 2009, Republic Act No. 9856 established the REIT mechanism in the country. REIT works as an investment vehicle that allows corporations to build new listed firms, which in turn, should pursue housing and other infrastructure projects.

REIT firms are offered special tax deductions in exchange for the granting of huge dividends to public investors who own it. The goal is to recycle capital, which is done through the entry of new investors and their funds being used by developers to build housing and infrastructure.

Six years since the law’s enactment, no corporation has ever established REIT after the government, through the law’s IRR, decided to hike public ownership to 67 percent by this third year, and imposed a 12-percent tax on additional income generated by REIT.

“Because of certain items in the IRR pertaining to the public float and taxation, REIT was never accessed by anyone for alternative funding (for housing). I don’t think any company has ever set up a REIT,” Bustos said.

Another issue, he said, is the setting up of an escrow account that would hold the 50-percent documentary stamp tax to be turned over to the government after two years should the REIT fail to list in the local bourse.

“We tied up their purse and tax savings into an escrow account until they meet the public ownership requirement. I don’t think anyone would like that,” Bustos explained.

The country has an estimated 3.6 billion housing backlog despite the booming property sector that heavily relies on banks for money. Bustos made the comment on REIT as the NHMC organizes the 2nd Asean Fixed Income Summit from Sept. 28 to 29.

The summit, he said, is meant to develop the fixed-income or securities market as “another source of financing” for the housing sector, just like the equity markets.

“We need additional source of funding. We have three circles: the banks, the fixed-income market, and the equity market. So far, the second circle is not yet saturated. We need to develop it before we can move to the third circle,” Bustos explained.

Sought for comment, the Bureau of Internal Revenue (BIR), which crafted the IRR on the REIT tax treatment, defended its regulations by saying tax exemptions should not be used to tackle “social issues.”

“If there was a real sincere desire to address housing backlogs, that would have been achieved already given the tax exemptions granting income tax holidays to low-cost housing and other requirements under the law,” BIR commissioner Kim Jacinto-Henares told The STAR.

“If you will look at REIT, it will not address the housing sector because that is (not) the market it is supposed to be targeting, but more of the commercial sector,” she added.

Securities and Exchange Commission (SEC) chairman Teresita Herbosa declined to comment. The SEC crafted the IRR on the minimum REIT public float.

For his part, Philippine Stock Exchange president Hans Sicat said it was wrong for the government to “outsmart” the market on REIT in the first place.